Post-termination restrictions are used by employers to protect their business by restricting an employee's activities for a period of time after their employment has terminated.
Any contractual term restricting an employee's activities after termination is considered by the courts as being in ‘restraint of trade’ and so void (i.e. unenforceable), unless the employer can show that:
• It has a legitimate business interest that it is appropriate to protect.
• The protection sought goes no further than is reasonably necessary to protect that interest.
Therefore the scope and duration of the restriction must be carefully considered. A restriction that lasts longer than is reasonably necessary to protect the employer’s business interests is unlikely to be enforced by a court.
What can be protected?
In broad terms, the rights that a court will allow to be protected fall into the following categories:
• Trade connections (with customers, clients or suppliers) and, more generally, goodwill.
• Trade secrets and other confidential information.
• Stability of the workforce.
Are there any recent decisions on the enforceability of post-termination restrictions?
In the recent case of BFAM Partners (Hong Kong) Ltd v. Gareth John Mills & Segantii Capital
Management Limited, a Hong Kong employer (the Former Employer) succeeded in enforcing a six-month clause prohibiting any competition against them by a former employee (Mr Mills). Such ‘non-compete’ restrictions are generally seen as difficult to enforce.
Mr Mills was initially engaged as a technology consultant and later promoted to the head of technology at the
Former Employer. His employment contract contained a six-month non-compete clause preventing him from
working for a competitor in respect of ‘products or services with which he was materially concerned or connected, or
for which he was responsible’.
What did Mr Mills do?
After leaving the employment of the Former Employer, Mr Mills immediately joined Segantii Capital Management Ltd (New Employer), a competitor of the Former Employer, as Chief Technology Officer.
What did the Former Employer do?
It successfully sought an injunction against both Mr Mills and the New Employer to enforce the non-compete clause against Mr Mills and to restrain the New Employer from benefiting from the breach of the non-compete clause.
The court ruled that:
1. The non-compete clause protected the legitimate interests of the Former Employer - The Former Employer produced evidence that Mr Mills played an instrumental part in the development of bespoke technologies of the Former Employer, which the Former Employer wished to protect.
2. The non-compete clause went no further than was reasonably necessary - The Former Employer explained that the life-cycle of trading strategies is usually around six months.
3. Mr Mills would continue to be paid during the non-compete period - Granting the injunction would carry the lowest risk of injustice as there was no evidence to show that the Former Employer would not continue to pay Mr Mills during the non-compete period.
What can we learn from this case?
Employers need to be prepared to identify the specific business interests they seek to protect and prove that without the restriction their interests would be prejudiced.
Employers should also be cautious when hiring from competitors, and they need to be aware of any non-compete or other continuing obligations which the candidate may owe to their former employer. As seen in this case, in suing the former employee, the Former Employer could also sue the New Employer for procuring a breach of the former employee’s contract.
If well drafted and considered, post-termination restrictions can be an effective means to protect business interests. We are ready to advise and support your business. Please get in touch with your usual 3CS contact for more information on how we can help.